Living inheritances are booming in Canada, here's why

If you want to avoid any disputes over family heirlooms, like art work, silverware and jewelry, dividing up assets while you’re alive can help.

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More Canadians are sharing their wealth with family members while they’re still alive as a way to help relatives buy homes, pay off debt, and enjoy more financial freedom, experts say.

“Living inheritances” — money given to children or grandchildren now instead of passing it on solely through a will — is becoming increasingly common among aging Canadians, and in particular, baby boomers.

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“People are doing for a number of reasons,” said Jamie Golombek, the managing director of tax and estate planning at CIBC Wealth Strategies Group. “They realize that they have a plan, they’re in good shape in terms of their own retirement, and they would like to see the kids enjoy the money while they’re still alive.”

“They’re working with their advisers saying, ‘I’ve got enough money to live on… I’m not going to run out of money, and therefore … I can afford to give some of it to the kids right now.'”

Children or grandchildren need money

Housing is a big reason why Canadians are opting to pass along their wealth sooner rather than later. In many parts of the country, it is increasingly hard for younger adults to break into the housing market, and without financial support, many simply can’t do it.

“Housing is certainly an issue in some cities in Canada,” Golombek said. “To help with a down payment, we are seeing gifts being made — substantial gifts being made — to their children.”

Research backs this up. According to a recent report by Mustel Group and Sotheby’s International Realty Canada, one-third of baby boomers in four of the country’s largest cities — Toronto, Vancouver, Calgary and Montreal — have given or are planning to give living inheritances to relatives to help them buy homes.

The study found that boomers are gifting money in light of “escalating housing prices and rising mortgage rates,” and think that without their financial gift, their beneficiary would not be able to secure housing or a conventional mortgage.

There are tax benefits

In Canada, there are no taxes on gifts. This means that any amount of money that’s considered a “gift” does not need to be reported, and won’t be taxed as income. That’s why many people prefer to pass on an inheritance — or a portion of it — to their children in the form of cash while they’re alive.

But, if someone is passing along a living inheritance in the form of property or a stock portfolio, for example, they may need to pay a capital gains tax if the gift has appreciated in value.

“Let’s say you own a summer home or cottage … and you give that to the kids, then you’re deemed to have sold it at fair market value — even though they don’t pay you for it,” Golombek said.

“There could be a capital gains tax on the difference between the cost that you paid for that , plus any improvements, and the fair market value. But if you just give a gift of cash or other property that hasn’t incurred in value, then there’s no gift tax.”

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Living inheritances can help keep things equal

The bank says that one beneficiary may end up paying more tax than another beneficiary depending on what they inherit, for example, taxable or non-taxable assets, which could significantly affect the value of their inheritance.

This can be largely avoided if you work with a financial planner and understand the implications of your will. “You can distribute equally while you’re alive, but you can also distribute equally on death,” Golombek said.

If you want to avoid any disputes over family heirlooms, like artwork, silverware and jewelry, dividing up assets while you’re alive can also help.

“Sentimental-value items that could cause massive disputes later on if there’s more than one kid, those are often given in advance,” Golombek said. “I’ve seen elaborate systems for those things, where child A comes in and gets one pick, then child B gets two picks, then they alternate back and forth.”

“Sometimes those are done in advance so the parents can watch this happen as opposed to them fighting over it later on.”